Reed Smith Client Alerts

Authors: David J. Gutowski Matthew L. Setzer

Type: Client Alerts

The New Jersey Tax Court issued its decision today in Elan Pharmaceuticals, Inc.,1 ruling that the Division of Taxation had improperly excluded receipts sourced to states in which the taxpayer was immune from income tax from the taxpayer’s sales-fraction denominator.

Under New Jersey’s throwout rule, which ceased to apply for tax years beginning on or after July 1, 2010, receipts assigned to a state in which the taxpayer is not subject to a tax on or measured by profits, income, or business activity, must be excluded from the denominator of the sales fraction.2 The receipts at issue in Elan Pharmaceuticals included sales of tangible personal property shipped from locations outside New Jersey to states in which the taxpayer was immune from tax under P.L. 86-272.3 In a prior decision, the Tax Court had suggested in dicta that throwout applied to receipts covered by P.L. 86-272.4 The decision in Elan Pharmaceuticals quotes from this prior decision, but ultimately reaches a different conclusion, holding that statutory income tax immunity was irrelevant as long as the origin state had jurisdiction over the taxpayer. In effect, the court reasoned that a state’s right to impose throwback trumps New Jersey’s right to impose throwout.

The taxpayer did not contest the Division’s application of throwout to receipts that were shipped from its warehouse in New Jersey, so those types of receipts were not before the court. Nonetheless, we think throwout is inapplicable to any sales of tangible personal property, as long as the taxpayer has some physical presence in both the origin state and destination state—regardless of whether it files an income tax return or is immune based on P.L. 86-272.5

Although the throwout rule expired for tax years after 2010, many taxpayers have pending corporation business (income) tax audits or appeals that include tax years for which throwout remains applicable. If your company was P.L. 86-272 protected and excluded any receipts from its sales-fraction denominator based on throwout, it is entitled to a refund.


  1. Elan Pharmaceuticals, Inc. v. Director, Division of Taxation (Docket No. 010589–2010).
  2. N.J.S.A. 54:10A-6(B) (repealed L. 2008, c. 120, § 2).
  3. 15 U.S.C. §§ 381 - 384.
  4. Pfizer Inc. v. Director, Div. of Taxation, 24 N.J. Tax 116, 134-35 (Tax 2008), aff’d, 25 N.J. Tax 519 (App. Div.), certif. granted, 204 N.J. 34 (2010).
  5. Throwout almost never applies to sales other than sales of tangible personal property. See, e.g., Whirlpool Properties, Inc. v. Director, Div. of Taxation, 26 A.3d 446 (N.J. 2011).

Client Alert 2017-045